When it comes to getting a mortgage, much of what you hear is true.
Underwriting is a bit tougher than it was 10 years ago.
There's added potential for snags in the process that can cause delays.
Sometimes, satisfying investor requirements is akin to the pleasure of getting a tooth pulled. There are also a lot of misconceptions out there about getting a mortgage. Many people think it's more difficult than it has to be. Many people incorrectly assume they can't get a loan because either their neighbor/friend/family member was declined and they seem like a perfect borrower, or because of something they've seen or read in the news.
Here are 5 of the biggest misconceptions I encounter nearly every day:
Mortgage Misconception #1 - You need 20% down payment to purchase a home
This is the biggest misconception around. Fact is, if you're a qualifying Veteran OR looking to buy a home in an area that's privy to USDA financing, you can buy a home with 0% down. Many states and counties around the country also offer down payment assistance programs that allow a buyer to use the FHA loan program with a 0% down payment as well. Not only do you not need 20% down, you don't even need 1% down in many instances!
For more traditional financing types, there is only a small down payment requirement. 3.5% for FHA loans, and 5% for conventional loans. With both loan types, any or all of the down payment funds can come in the form of a gift.
Even for buyers looking at luxury properties, there are many Jumbo loans that require only 10-15% down.
I repeat (you should repeat this, too, to help clear up the misconception): You do NOT need 20% down to buy a home.
Mortgage Misconception #2 - You need perfect credit to get a loan
Fact is, "perfect credit", "terrible credit", and "good credit" are very subjective terms. I've had borrowers assume their credit is poor because they paid their student loan or another mortgage 10 days past the due date - in reality, their credit was perfect (in case you're wondering, 740+ is considered perfect by most lending standards). Likewise, a "perfect" credit score doesn't translate to success if there's no credit history.
It's true that credit tightened up a few years back, but that's well behind us now. We're seeing programs come out for lower FICO scores nearly every day. FHA borrowers can get a loan with FICO scores well down into the 500's. A few missed credit card payments or student loan lates won't necessarily exclude you from getting a mortgage.
The pendulum is swinging back to a place where common sense is playing a role in getting a mortgage. While the process may be a little more smooth sailing for borrowers with pristine credit, those with some bumps in the road should not assume they can't get a mortgage. Chances are, they can, now or in the very near future.
Mortgage Misconception #3 - ARMs are bad (Adjustable Rate Mortgages)
Thanks to their role in the "mortgage meltdown", ARMs have gotten a bad rep. In reality, the adjustable rate mortgage programs available today are nowhere close to the toxic ARM's of the early 2000's. Back then, lenders could put you in a loan that would adjust in 2 years AND carried a prepayment penalty for 3 years - resulting in "damned if you stay in the loan, damned if you get out of the loan" scenario. Thanks to new laws, lenders can no longer get away with those shenanigans.
ARMs today can be a great financial tool - they're perfect for folks in short term ownership positions, great for first time buyers with strong potential for large increases in income (FHA ARMs can only adjust 1% per year after their adjustment period begins, meaning no huge jumps in payment, AND they start with much lower rates), and outstanding loans for borrowers using their mortgage as a cash flow tool.
ARMs are not for everyone. They're also not the heinous options they've been portrayed as. If you're working with a trusted mortgage advisor, they can help determine if an ARM is a smart option.
Mortgage Misconception #4 - Paying off your mortgage ASAP is always the best move
Everyone that's ever gotten a mortgage has signed the documents on settlement day looking forward to the day when they'll make that last mortgage payment. When it comes to retirement planning, most of the time it's important to try & retire without a mortgage payment, but many financially savvy borrowers know that mortgage debt can be a great tool.
Home ownership offers tax advantages that renters just don't get. In the low interest rate environment we're currently in, mortgage debt also comes with less of a cost than the profits that can be made in other investments. If a mortgage is being paid at a rate of 3%, and an investor can get 8% on an investment, would they be wiser to eliminate that 3% debt (that comes with tax benefits) or to pad the balance of the investment returning 8%?
Sometimes taking out a larger mortgage is also a smart option. I've worked with self-employed clients that use their mortgage as a financial tool to get cash to inject into their businesses. I've seen businesses grow & expand (along with my client's income) on the funds from cash-out mortgages.
Similar to ARM loans, not everyone should go max out their mortgage and pull cash out or perpetually renew their mortgage to a 30 year term, but for many people, mortgage debt can effectively be used as part of their financial planning strategy. Working with a good loan officer and a trusted financial adviser can help you decide your best options.
Mortgage Misconception #5 - The most you can borrow is $417,000
$417,000 is the limit thrown out as the maximum loan amount for "good" financing terms. The reason for this is that $417,000 is the max loan limit for conventional financing in most counties around the country. The misconception is that $417,000 is the maximum loan limit for all programs in all areas.
For example, in San Francisco, CA, 2014 loan limits allow borrowers to obtain a loan up to $625,500 with the same conventional terms as those borrowing $417,000 or less on 1-unit properties.
Multi-unit properties, which are becoming more popular amongst buyers & investors, also allow for loan limits higher than the standard $417,000. For example, a borrower in Cape May county New Jersey can borrow up to $417,000 to purchase a single family home, but they can borrow up to $810,950 to purchase a 4-unit home.
Multi-unit properties in high cost areas? Borrowers buying multi-unit properties in high cost counties can in some cases borrow over $1 million under conventional and FHA programs. Loan limits vary by county, and program guidelines vary as well (rates & loan-to-value caps may be different on multi-unit properties).
VA loans also have varying loan amount caps for different areas. Many jumbo lenders are offering very competitive loan terms at very competitive rates with loan amounts up to $5,000,000. While $417,000 is the max conventional loan amount for single family homes in most counties, there are plenty of options for borrowers who need more.
What's the best way to clear up your mortgage misconceptions? Speak with a lender you can trust, has experience and many programs available. It's always a good idea to work with your lender AND your financial adviser to determine the best loan to fit your personal plans.
The mortgage process doesn't have to be convoluted or difficult, you just have to get past the mortgage misconceptions.
Of course, you can reach us at 973.440.8209 with any questions you might have.
Till next time,
Managing Partner | The Klinar Group | NMLS # 1470826
New Jersey | New York | Florida | Arizona
Phone: 973.440.8209 | Fax: 844.526.7367 | E-mail: firstname.lastname@example.org